Many employees in the tech industry are offered an Employee Stock Purchase Plan, or ESPP, as part of their compensation package. What’s the deal with the ESPP, and should you take advantage of it? Make sure you understand how it works, and figure out how to best utilize it. Let’s take a look.
What is it?
An ESPP allows you to become eligible to buy company stock at a discounted price.
Should you take advantage of it?
We absolutely recommend considering taking advantage of your ESPP, if offered by your employer. It’s a great benefit, one that you’ve earned through your hard work and success in your industry. However, you’ll want to factor in concentration risk as you participate in the ESPP and begin to accumulate company stock over time.
How does it work?
Participants pay into the plan each pay period as an automatic payroll deduction. On certain dates, stocks are purchased on their behalf at a discounted rate. Structures of plans will vary, and so will periods of accumulation of funds and purchase, so check with your employer for specifics on your plan.
When should you participate?
Similar to RSUs, make sure you consider potential tax liabilities and look to determine optimal timing for when you should participate in the ESPP option.
You must pay taxes on capital gains from your discounted stock, and it is essential to consider the analytics of the markets and your company outlook when assessing your level of concentration versus diversification. Think of ESPP as a revolving door to take advantage of the discounted pricing. Consider holding the position until it is classified as a long-term gain—an asset held over a year that is potentially subject to a lower tax rate.
Still have questions?
That’s okay. ESPPs can be confusing, but we’re here to help. We’re happy to take a look at your plan and help you make a determination and strategy for utilizing your ESPP. Reach out to us, and we can get started.
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